Where Entrepreneurs Go And the Internet Is Free; Wi-Fi Providers Rethink How to Make Money

Linda Branagan would seem to be the ideal customer for entrepreneurs and telecommunications companies looking to make money selling wireless Internet connections. But, like thousands of business road warriors, Ms. Branagan often does not pay for the service because she gets it free.

At cafes, malls and downtown business districts, there has been an explosion of Internet access points, or Wi-Fi hot spots, that let computer users log on to the Internet for free. That growth is a fundamental reason -- though not the only one -- that technology start-ups, investors and industry analysts who had high hopes for Wi-Fi are scrambling to find sustainable business models.

Ms. Branagan, a director of a medical device research company, pays T-Mobile, a unit of Deutsche Telekom, $6 an hour for a wireless Internet connection when she is in airports if there are no free access points. But it is another matter when she is working outside the office in San Francisco.

''The Internet is free here,'' she said, as she sat doing research at The Canvas, an art gallery with a lounge and cafe setting in San Francisco's Sunset district. ''Why would I pay T-Mobile?'' she asked, when the cafe owners provide free Internet access to attract patrons.

But the difficulty of making a profit was made evident last month with the demise of Cometa Networks, a well-heeled Wi-Fi start-up backed by I.B.M., the Intel Corporation and the AT&T Corporation. Cometa, founded in 2002 to build a network of access points at retail outlets, announced on May 19 that it would suspend operations because it was not providing a suitable return to investors. Verizon Wireless, which said last year that it would build 1,000 Wi-Fi hot spots in Manhattan, has cut that number to around 500.

Meanwhile, thousands of free hot spots have been established by public agencies, mom-and-pop businesses hoping to attract customers and individuals working to build a grass-roots based network. A handful of city governments, some in cooperation with local businesses, are deploying free Wi-Fi networks in parts of Jacksonville, Fla., lower Manhattan and Portland, Ore., among other places.

''It's going to be hard for commercial carriers to make a profit,'' said Dewayne Hendricks, the chief executive of Dandin Group, a wireless Internet service provider based in Silicon Valley, who serves as technical adviser to the Federal Communications Commission on wireless Internet issues.

Mr. Hendricks said the remarkable spread of free networks was forcing commercial carriers to rethink their strategies.

''The infrastructure is being built from the bottom up,'' Mr. Hendricks said, referring to a municipal and grass-roots effort to deploy wireless connections. ''How that plays out is potentially monumental,'' he said in affecting the way Internet access is provided.

Each Wi-Fi hot spot has a radio transmitter and receiver that is connected to the Internet through a broadband connection like a digital subscriber line, or D.S.L. The transmitter communicates with personal computers and enables them to send information to, and receive information from, the Internet. The transmitters typically have a range of 150 to 1,000 feet, though there is new technology emerging that could send a signal over several miles.

Because transmitters can be on different networks, a dozen or more hot spots can operate simultaneously in any given area, providing overlapping coverage. The connections do not interfere with each other because they are working on different radio channels. For users in big metropolitan areas like New York City and San Francisco, a free connection can almost always be found on blocks where hot spots are dense.

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T-Mobile has 4,650 Wi-Fi hot spots in Kinko's, Borders Bookstores, hotels, airports and Starbucks cafes, and it is adding 35 a day, the company said. Last week, it announced plans to deploy hot-spot connections in 122 Hyatt Hotels in North America. Users pay $9.95 for single-day access, $29.99 for a monthly access to all hot spots in the network or $19.95 a month if they are customers of T-Mobile's cellphone service.

The company would not disclose how many customers it has, or its revenue or profits. But Joe Sims, general manager of T-Mobile's Wi-Fi business, said, ''We fully expect to make money in the public hot-spot business.'' He noted that the company has learned some important lessons -- namely, that the hot spots need to be in locations with heavy traffic from business customers and that a profitable Wi-Fi business needs to build a national network and brand that will give users the ability to log on at a variety of locations using the same service.

In the case of T-Mobile, he said, the company is keeping costs low by having the Wi-Fi division and its mobile-phone business share an underlying data network, as well as the network operation and customer call centers. Mr. Sims also he said the company is exploiting its brand name by marketing the wireless connection service to its existing cellphone customer base of 14.3 million users.

Mr. Sims said he is not worried about the growth in free hot spots because he believes commercial networks can offer more reliable, more secure Internet access. Free service is fine for casual and periodic use, he said, but ''when you absolutely, positively have to get that report downloaded or get access to your company system to conduct business, free probably isn't going to cut it.''

Indeed, when Ms. Branagan, 37, travels for business, she said she pays T-Mobile on an hourly basis for Internet access, mostly while waiting in the United Airlines Red Carpet room, where there is no free option. She added that she probably would sign up for a longer-term plan if the service were less expensive.

Sitting beside her at the San Francisco cafe was Paul Hagen, 39, who runs a technology consulting company. Mr. Hagen said he would consider subscribing to a Wi-Fi plan if there were a provider that offered universal access to hot spots everywhere.

That challenge -- giving consumers the ability to pay for a single plan that covers hot spots in a variety of locations -- may be essential to growth in the service, according to industry analysts.

In the cellphone industry, universal access is accomplished by ''roaming agreements'' that let the customers of one mobile-phone provider use the network of a competitor. Most roaming agreements in the Wi-Fi business, said Mr. Sims of T-Mobile, are still relatively limited.

In other respects, too, the Wi-Fi business may well go the way of other telecommunications services, said Ms. Wiggins of the Yankee Group, in that it could become dominated by telecommunications companies that already sell cellular, Internet and landline phone services in bundled plans.

SBC Communications Inc., the regional phone company based in San Antonio, previously said it would roll out 3,000 hot spots by the end of next year, largely at UPS retail outlets. And in an announcement planned for Monday, SBC said it plans to offer access in 6,000 McDonald's outlets around the country.

The cost is $19.95 a month for unlimited access. But Michael Coe, an SBC spokesman, said the company ultimately planned to offer a substantial discount to its existing customers. He said that SBC did not expect its hot spots to become a stand-alone business, but rather an offering along side cellular, Internet and land-based telephone service.

While Wi-Fi ''offers a revenue generating opportunity,'' he said, ''it's real benefit to SBC is as a customer retention and acquisition tool.''

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A version of this article appears in print on June 7, 2004, on Page C00001 of the National edition with the headline: Where Entrepreneurs Go And the Internet Is Free; Wi-Fi Providers Rethink How to Make Money. Order Reprints|Today's Paper|Subscribe